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Channel Stuffing Trade Loading
This is a particular method wherein, there is inflation in the figure of sales of the organization by way of channel distribution. In this case, the organization provides the higher level of products to distributors and suppliers for showing that, it has enhanced its sales to a considerable extent. It is also being considered as trade loading. This particular activity is carried out by the organization at a particular point of time is being considered as an illegal method of doing the tasks.
Example of Channel Loading
In case of the example of this particular method of enhancing the sales, the organization works towards enhancement in the level of sales by providing the products to sellers and distributors to a larger level. The excessive products being provided to sellers and distributors will either be returned to them or there will be a case that the products will remain unsold. The distributors will not make the sale of the products to the patients as the products would be expired after a particular period of time. The organization is also not going to receive payments for the products being provided by it to the distributors and other sellers. This is going to make the influence on the accounting activities being carried out by the organization.
Effects of Channel Stuffing
· The accounts receivables of the organization are going to increase to a certain extent. This will happen as the organization would be showing sales at a higher level in comparison to the normal sales being generated by it at a particular point.
· It is also possible that the distributors would send the unsold products back to the organization. In this case, the organization will be required to incur a higher level of carrying a cost.
· The profits of the organization will also be affected as a result of the fact that the goods would be returned. The image of the organization is also going to be affected to a certain extent.
· In the future, it is also likely that the distributors might not place the orders in the area of doing the tasks.
· The discount being provided at the time of channel stuffing is likely to lead to having a negative effect on the profits of the organization.
Channel stuffing and GAAP
According to Generally accepted accounting principles, it is being provided that the organization should recognize revenue when it has occurred and there are high chances that the organization will generate revenues. The sale of excess inventories is not being recognized in the course of doing the tasks in the area of usage of GAAP. Therefore, there are cases wherein, channel stuffing is likely to be termed in the course of being a fraud being carried out by the organization. This is going to create imbalanced in the area of doing the sales transactions within the organization. This particular thing is definitely going to be considered as the fraud by the organization.
Corrective Actions for Channel Stuffing
a. Channel stuffing occurs when the employees of the organization have to make sure that they meet the sales targets. In the course of the meeting of sales targets then, it is going to be a scenario wherein, the targets being set up by them are being considered to be unrealistic.
b. The auditor of the organization should make sure that, he considers all the forecasts being carried out by the organization and accordingly sales transactions should be recorded by the organization in the course of achievement of best results without any kind of trouble or issue arising in the course of doing the operations at a particular point of time.
c. The organization should ensure that it is revising the factors which make an influence on sales of the organization such as sales cycle, sales incentive scheme, sales performance, terms and conditions of trading, and other kinds of things.
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